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Can Micro-Credit Bring Development?

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Author Info

  • Christian Ahlin

    (Department of Economics, Vanderbilt University)

  • Neville Jiang

    (Department of Economics, Vanderbilt University)

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    Abstract

    We examine the long-run effects of micro-credit on development in an occupational choice model very similar to Banerjee and Newman (JPE, 1993). Micro-credit is modeled as a pure improvement in the credit market that opens up self-employment options to some agents who otherwise could only work for wages or subsist. Micro-credit can either raise or lower long-run GDP, since it can lower use of both subsistence and full-scale industrial technologies. It typically lowers long-run inequality and poverty, by making subsistence payoffs less widespread. A case exists, however, in which it both lowers output per capita and raises poverty in the long run. The key to micro-credit's long-run effects is found to be the "graduation rate": the rate at which the self-employed build up enough wealth to start full-scale firms. We distinguish between two avenues for graduation: "winner" graduation (due to supernormal returns) and "saver" graduation (due to accumulation of normal returns). We find that "winner" graduation, however high its rate, cannot bring long-run development. In contrast, if the saving rate and normal returns in self-employment are jointly high enough, then micro-credit can bring an economy from stagnation to full development via "saver" graduation. The lasting effects of micro-credit may thus partially depend on simultaneous facilitation of micro-saving.

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    File URL: http://www.accessecon.com/pubs/VUECON/vu05-w19.pdf
    File Function: First version, 2005
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    Bibliographic Info

    Paper provided by Vanderbilt University Department of Economics in its series Vanderbilt University Department of Economics Working Papers with number 05019.

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    Date of creation: Jul 2005
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    Handle: RePEc:van:wpaper:0519

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    Web page: http://www.vanderbilt.edu/econ/wparchive/index.html

    Related research

    Keywords: Micro-credit; microfinance; long-run development; occupational choice; credit markets; poverty; inequality;

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    References

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    1. Kiminori Matsuyama, 2001. "On the Rise and Fall of Class Societies," Discussion Papers 1326, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    2. Banerjee, Abhijit V & Newman, Andrew F, 1993. "Occupational Choice and the Process of Development," Journal of Political Economy, University of Chicago Press, vol. 101(2), pages 274-98, April.
    3. Besley, Timothy & Coate, Stephen, 1995. "Group lending, repayment incentives and social collateral," Journal of Development Economics, Elsevier, vol. 46(1), pages 1-18, February.
    4. Maitreesh Ghatak & Timothy W. Guinnane, 1998. "The Economics of Lending with Joint Liability: Theory and Practice," Discussion Papers 98-16, University of Copenhagen. Department of Economics.
    5. Christian Ahlin & RobertM. Townsend, 2007. "Using Repayment Data to Test Across Models of Joint Liability Lending," Economic Journal, Royal Economic Society, vol. 117(517), pages F11-F51, 02.
    6. Karlan, Dean S., 2007. "Social Connections and Group Banking," CEPR Discussion Papers 6194, C.E.P.R. Discussion Papers.
    7. Krishna Kumar & Elizabeth Caucutt, 2005. "Evaluating Explanations for Stagnation," 2005 Meeting Papers 387, Society for Economic Dynamics.
    8. Joseph P. Kaboski & Robert M. Townsend, 2005. "Policies and Impact: An Analysis of Village-Level Microfinance Institutions," Journal of the European Economic Association, MIT Press, vol. 3(1), pages 1-50, 03.
    9. Banerjee, Abhijit V & Besley, Timothy & Guinnane, Timothy W, 1994. "Thy Neighbor's Keeper: The Design of a Credit Cooperative with Theory and a Test," The Quarterly Journal of Economics, MIT Press, vol. 109(2), pages 491-515, May.
    10. Kiminori Matsuyama, 2007. "Credit Traps and Credit Cycles," American Economic Review, American Economic Association, vol. 97(1), pages 503-516, March.
    11. Banerjee, Abhijit & Newman, Andrew F, 1998. "Information, the Dual Economy, and Development," Review of Economic Studies, Wiley Blackwell, vol. 65(4), pages 631-53, October.
    12. Ghatak, Maitreesh, 1999. "Group lending, local information and peer selection," Journal of Development Economics, Elsevier, vol. 60(1), pages 27-50, October.
    13. Beatriz Armendariz & Jonathan Morduch, 2007. "The Economics of Microfinance," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262512017, December.
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    Cited by:
    1. Paul, Bénédique & Garrabé, Michel, 2011. "Le capital institutionnel dans l'analyse du développement : Prolongement théorique et premier test empirique
      [Institutional Capital in Economic Development Analysis: Theoretical Continuation and
      ," MPRA Paper 39016, University Library of Munich, Germany.

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